Treasury man Henry Paulson’s ideas to remodel the regulatory system governing financial markets are dominating the headlines today. But there may be a bigger story coming down the road, one that is of much greater immediate significance to economic policy.

Namely, there are lots of rumors out of Washington that the Bush administration is going to capitulate to the Chris Dodd–Barney Frank FHA bailout of sub-prime mortgage holders.

This could run up to $400 billion of FHA guarantees. And even though lenders would take up to a 15 percent haircut on discounted loan values, and borrowers would have to give back a percentage of their future capital gains if home prices ever rise again, this would be the most sweeping housing-assistance plan in history. It could include as many as 2 million homeowners, and a big chunk would go to rescuing delinquent homeowners now in foreclosure.

Though President Bush told me in an interview a couple of weeks ago that he didn’t like the Dodd–Frank plan, it seems that the Fed/Treasury effort to sell Bear Stearns to JPMorgan and pour a $30 billion backstop loan to cover sub-prime collateral has a lot to do with what is apparently a major shift in White House policy.

In other words, Main Street is up in arms over the appearance of a Wall Street bailout.

The deal is not done yet, but the rumor mills are heavy. It seems like nowadays in Washington nobody is allowed to fail at anything. Of course, as Friedrich Hayek taught us years ago, free-market capitalism is about success and failure. But that view is very unpopular in this election year.

As for Mr. Paulson’s regulatory-reform plan, the Federal Reserve would be the big winner. But nothing’s gonna happen for years as the regulatory bureaucracy fights among itself and its chief lobbyist backers.

One deregulatory measure that is lacking from anybody’s plan is a sharp cutback or outright elimination of the Community Reinvestment Act (CRA), which essentially puts a gun to the head of all lenders unless they issue mortgages to various minority groups, low-income folks, and both legal and illegal immigrants. Lenders out of compliance would be penalized as regulators would disallow any new business plan for mergers, acquisitions, or new products. Community groups like Acorn could rat out lenders by showing data to the regulators who then would step into action.

Along with the Fed’s easy-money housing bubble, CRA is one of the prime movers in the sub-prime housing mess in which we find ourselves today.

The FEDERAL RESERVE's role in the Bear Stearns/JP Morgan deal and subprime mortgage problems will be debated with:

* Peter Morici, University of Maryland business professor and former chief economist of the U.S. International Trade Commission* Less Hoskins, senior fellow at Pacific Research Institute and former Cleveland Federal Reserve president.

FORECLOSURES/HOUSING RAGE issues with John Carver, a foreclosures specialist with Prudential Americana Group.

OBAMA'S REGULATION PLAN & MARKET IMPACT...Peter Wallison, senior fellow at the American Enterprise Institute, will lead us off with his take on Obama's plan and how it could affect the market and economy.

WASHINGTON TO WALL STREET...The Dynamic Duo will debate. Joining us are Robert Reich, former Clinton labor secretary, public policy professor and author of "Supercapitalism" and Steve Moore, senior economics writer and member of The Wall Street Journal editorial board.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Pollster Frank Newport, a Kudlow & Company regular and editor-in-chief of the Gallup Poll, revealed some very interesting information this morning. These numbers below are a big deal. As I wrote yesterday, we're not far from the point where John McCain establishes a commanding lead in the run-up to November.

Here's the Gallup headline:

If McCain vs. Obama, 28% of Clinton Backers Go for McCain

PRINCETON, NJ -- A sizable proportion of Democrats would vote for John McCain next November if he is matched against the candidate they do not support for the Democratic nomination. This is particularly true for Hillary Clinton supporters, more than a quarter of whom currently say they would vote for McCain if Barack Obama is the Democratic nominee. . . .

Tuesday, March 25, 2008

Hillary’s fictitious tale of sniper fire in Bosnia might help Obama, but the real winner here is John McCain.

The CBS footage making the rounds clearly refutes the former first lady’s claim that she had to run for cover from sniper fire when she got off the plane in Bosnia. There was no sniper fire. In fact, dignitaries greeted Mrs. Clinton and her daughter Chelsea on the tarmac. She then had a photo-op posing with soldiers. She and Chelsea were mingling, leisurely, with dignitaries and others at the airport ceremony.

A boon to Obama like some media commentators predict? Maybe. But he’s had some delusional episodes of his own. Before changing his tune, Obama claimed that he didn’t hear — in person, inside the church — Reverend Jeremiah Wright’s inflammatory, anti-American, black power sermons. A whopper delusion.

No, the real winner here is John McCain. Mac did come under sniper fire. He came under all manner of wartime fire. His plane was shot down from the sky. Shortly thereafter, he was taken to the Hanoi Hilton as a prisoner-of-war — for five years.

McCain may occasionally misspeak, as he apparently did on the question of Iran arming al Qaeda. (Although many do in fact believe Iran is arming the terrorist group.) But rest assured — John McCain is not a liar. Far from it. He has absolutely no need to bolster his life experience when it comes to warfare, combat, or anything else.

Here’s what’s going on right now: The more the American public sees and hears Hillary and Obama, the more voters are moving to McCain. Democrats and independents are shifting to McCain in droves. McCain commands a strong lead over Hill-Bama in the national match-ups. And his favorables are rising while his unfavorables are falling. It’s just the opposite with Hill-Bama: Unfavorables are up, favorables are down.

This whole faux-military, faux-commander-in-chief Hillary charade reminds me of Sen. McCain’s GOP-debate zinger earlier in the campaign. When asked about Hillary’s ridiculous earmark for the Woodstock museum, McCain replied that he didn’t know much about it. He said he was “tied up at the time.” Voters remember stuff like that. They will remember Hillary’s Bosnian delusion. They will remember Obama’s Reverend Wright controversy, too.

Right now the stock market is heading higher in part because of aggressive Fed actions to pinpoint discount loans and backstop the financial system. This, of course, is mitigating the sub-prime problem. But don’t discount McCain’s role in this, too. His clear emergence as the frontrunner, with an ever-widening lead over Hill-Bama, is also boosting stocks. Why? For the simple reason that tax burdens will not be raised on investors if McCain becomes president. Nor will free trade be cut off.

From my perch, we don’t look far from the point where John McCain establishes a commanding lead in the run-up to November. Incidentally, the stock market bottom was back on January 22. This was right about the time the Arizonan started to surge.

ONE-ON-ONE WITH JACK KEMP...The former congressman, leading supply-side economic advocate and advisor to Senator John McCain will discuss the Republican presidential candidate's position on housing and the economy.

MONEY POLITIC$...Our Washington to Wall Street panel will discuss and debate all the latest political developments including Senator Clinton's Bosnian delusion.

Monday, March 24, 2008

The Fed’s rebate is about three-times bigger than what Uncle Sam is promising.

Ihave really learned to like Ben Bernanke. He’s the man. And his interest-rate cuts are vastly more effective than the so-called economic-stimulus rebate plan coming out of Congress and the White House.

Why do I say this? Simple. I just got my latest adjustable-rate mortgage statement from the bank. When I originally refinanced this loan, it was 5.75 percent. And last summer my ARM soared to 8.25 percent. But guess what? Through February it has round-tripped all the way back to 6 percent.

So I’m now saving $2,000 a month, or $24,000 a year, because Gentle Ben has slashed the fed funds target rate to 2.25 percent from 5.25 percent last fall.

He’s my kind of guy.

And you know what else? I’m not even getting a tax rebate from Washington. I make too much money.

That’s the message I just got from the IRS. They sent me -- and about 135 million other taxpaying households -- a recent notice. As I thumb down this little letter I learn painfully that taxpayers with adjusted gross incomes of more than $75,000, or more than $150,000 if married and filing jointly, will have their rebate payments reduced or phased-out completely.

I showed this letter to my beautiful bride. We concluded that we’ll be phased-out completely.

By the way, this little IRS letter cost the taxpayers a cool $42 million. That’s right. The administrative expense of this “phased-out completely” IRS note is costing all of us 42 very, very large.

But who cares? Gentle Ben has come through with a wonderful windfall.

Incidentally, those of us whose rebates will be reduced or phased-out completely comprise the top 5 percent of taxpayers and pay 60 percent of all personal income taxes. In total, three-fifths of hard-working Americans will get little or nothing from the famous rebate. Doesn’t hardly seem fair, does it?

But like I said, who cares? The Fed has come through. And not just for upper-income earners, either.

I did some back-of-the-envelope calculating for so-called median-price homeowners. The latest news from the National Association of Realtors is that falling home prices are spurring at least a small increase in home sales. That’s called the free-market. When the price of something falls, we buy more of it. So as existing median home prices dropped again in February (they’re down 14 percent from the peak two years ago), home sales went up slightly, by 2.9 percent. Of course, home sales are still down 30 percent from the peak set in mid-2005. But the market is adjusting. And as it continues to do so, more and more people will purchase homes and realize their great American dream.

So right now the so-called median home price is $196,000, roughly back to 2004 levels. And it’s still about 60 percent higher than ten years ago. (Studies show homeowners generally don’t sell for about a decade, so I use ten years as the comparison.) But here’s where Gentle Ben comes in. A $196,000 home and a 10 percent equity down payment leaves $176,000 to be financed, perhaps with an adjustable-rate mortgage. And since the Fed slashed its target rate and LIBOR rates dropped roughly in sync, the owner of this median-price home is now saving $300 a month compared to last summer, or about $3,600 a year.

That’s a big rebate from the Fed. It’s about three-times bigger than what Uncle Sam is promising. The official IRS notice says the average married couple filing jointly may get $1,200. But Fed head Bernanke is giving median homeowners $2,400 more than that amount. A lot better, right?

Incidentally, all of Bernanke’s emergency machinations to fight the recession in housing and housing-related credit are starting to show very positive effects. Along with various new schemes to backstop the banking system and provide short-term lending help to banks and broker-dealers, many on Wall Street are coming around to the view that something called “systemic risk” is being reduced in the financial world. That includes all those lousy sub-prime securitized mortgages, along with various buyout loans and nasty things like collateralized debt obligations. Sharp-eyed Wall Street analyst Dick Bove puts it quite simply: The worst of the financial crisis may well be behind us.

This, in turn, has caused a big rally in stocks. On top of that, the value of the dollar on foreign-exchange markets is beginning to go up and the price of gold has plunged nearly $100. All this has moved longtime inflation bear Donald Luskin to suggest that the worst of the future-inflation threat may now be over.

So you know what? Let’s give this guy Bernanke a little credit. I think I may make him my new best friend.

PRESIDENTIAL POLITICS...Mike Allen, chief political correspondent at The Politico, will deliver an update on all the latest election news and developments.

HILLARY, BAILOUTS, REGULATION & MORE...The Dynamic Duo will debate. Joining us are Robert Reich, former Clinton labor secretary, public policy professor and author of "Supercapitalism" and Steve Moore, senior economics writer and member of The Wall Street Journal editorial board.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Thursday, March 20, 2008

With the dollar rising all of a sudden, and commodity prices plunging, this would be a great time for the Treasury to get out there and buy dollars. Totally squeeze the short sellers. Right now. Send a clear statement that the U.S. wants a stronger dollar. It would do a lot to reduce inflation expectations. And it would drive gold prices down $200 from here.

On the fifth anniversary of the Battle of Iraq, this kind of dollar defense would be a definitive statement that neither the United States nor its currency is weak. Folks betting against America would be proven wrong.

This would also be a great time for Sen. McCain, who is traveling overseas, to talk about a strong dollar — both for financial reasons and to promote American prestige. It would underscore that the U.S., despite its temporary economic slowdown, is not weak in any way.

The Fed helped the dollar and hurt commodities by its “less is more” policy decision Tuesday, where they cut the fed funds rate by 75 basis points instead of 100. They also devoted more attention to the inflation threat in their policy statement. Meanwhile, two Reserve Bank presidents — Dick Fisher in Dallas and Charlie Plosser in Philadelphia — dissented from the 75 basis point cut due to their concerns over inflation.

The Fed is coming to the end of the easing road. They are laying the groundwork for a sounder greenback. Now’s the time for the Treasury to come in and punctuate the change in Fed policy and commodity- and currency-market sentiment.

What exactly is wrong with an optimistic president who has confidence in the long-run future of the American economy?

President Bush took this stance in a recent interview with me and at the Economic Club of New York. He told me, “Like any free market, there’s also downturns, and we’re in one. But I am confident in the long-term strength of our economy.”

Optimism, after all, is one of the few levers our chief executive can use every day. By remaining optimistic, Bush is borrowing a page from Ronald Reagan, and rejecting a whole book of malaise from Jimmy Carter.

Bush is dealing with the housing and mortgage credit virus. But he will avoid anything that will doom future economic growth. He wants to stop overzealous regulatory legislation that will turn the U.S. back thirty years. And he won’t bow to tax hikes and trade protectionism. While the rest of the world is embracing free-market American-style capitalism, he won’t lurch left with big-government programs.

Home prices must adjust lower to end the housing downturn. And it’s precisely these lower prices that will allow young families to afford new homes. Prices may fall, but homes don’t go away. Markets, not government, are the best way to sort this out.

It was Hoover who signed the Smoot-Hawley trade-protectionism act and overturned the Coolidge-Mellon tax cuts. These disastrous measures — along with monetary contraction from a fledgling Federal Reserve — turned a recession into a depression. FDR didn’t help matters, either. His misbegotten tax hikes on successful earners and businesses, and his alphabet agencies to control the industrial and farming sectors, extended the depression and held unemployment near 20 percent.

Today, it’s the Hill-Bama Democrats who want to raise taxes on successful producers. And they want to turn protectionist by reopening NAFTA and stopping any new open-trade treaties. Schumer himself has spent years bashing China, threatening the nation with huge tariffs if its currency policies don’t conform to demands.

If anyone has resurrected the party of Hoover, it’s today’s Democrats. They’ve adopted pessimism as their national pastime, and want us to believe we’re already in a long and deep recession.

But not so fast.

The growing export sector is showing considerable strength. So are agriculture, energy, industrials, and international infrastructure. The e-forecasting economic service says GDP had a small gain in February and a positive reading of 1.5 percent over the past six months. The economy isn’t collapsing. And while it may be flat, there’s no deep recession.

Hooveresque monetary contraction? It’s not there, either. After numerous Fed easing moves, the three-month growth of the monetary base has shifted from minus-4 percent last December to plus-6 percent in mid-March. The broader M2 money supply has registered an 11 percent annual gain over the past three months.

Inflation remains a worry. And despite dissenting votes by Reserve Bank presidents in Dallas and Philadelphia, the Fed slashed its target rate by 75 basis points this week. But the Fed’s statement put a greater emphasis on inflation — which has risen to 4.5 percent — and the inflation-sensitive gold price dropped $65 on the news.

Big inflations cause deep recessions, and hopefully the central bank is moving back toward price stability. In fact, now would be a perfect time for the Treasury to publicly support a stronger dollar, and to conduct some dollar diplomacy with the G7 nations to defend the greenback.

On the housing-credit front, University of Michigan economist Mark Perry, using data from the Mortgage Bankers Association, points out that of the 46 million mortgages outstanding, only 2.04 percent were in the foreclosure process in last year’s fourth quarter. And most of those were confined to Nevada, Florida, Michigan, and Indiana.

Meanwhile, commercial mortgage delinquencies ended 2007 near record lows. And get this: Over the past year bank loans to businesses have grown by $250 billion. During the credit crunch of the early 1990s, these loans fell by $60 billion. Believe it or not, credit is still available, even to small businesses.

In the stock market, the best-performing sectors since the January 22 bottom have been transports (trucking and railroads), basic materials, energy, and industrials. These economic-sensitive areas point to a solid near-term pickup in economic growth.

Even John McCain is picking up. New polls from Zogby and Rasmussen give him a 6 to 8 point lead over Hill-Bama — a nod to Reagan-Bush pro-growth policies instead of high-tax, protectionist big-government from the Democrats.

So I’m glad President Bush is taking an optimistic view. That’s called leadership.

Wednesday, March 19, 2008

Has anyone noticed that John McCain is surging in the polls? According to the latest print from Rasmussen and Zogby, McCain now holds a 6 to 8 point lead against Hill-Bama. And I doubt that Senator Obama’s speech yesterday will change anything. It was nothing more than a non-denial denial of his fidelity to Reverend Jeremiah Wright and Wright’s hard-left anti-American agenda.

(For those interested in especially good commentary on Obama’s speech, I suggest reading Ronald Kessler’s piece over at Newsmax, as well as the editorial in Investor Business Daily. Both have insightful critiques.)

McCain’s surge means that it is much less likely that Herbert Hoover-style high-tax and trade-protectionist proposals will come from Hill-Bama. This point will not be lost on the stock market.

And what about Congress? Well, there’s a good article by John Gizzi in Human Events suggesting that Republicans will actually pick up seats in the House this November. According to Oklahoma Republican Tom Cole, chairman of the Republican Congressional Committee, 61 House Democrats are running in districts that President Bush carried in 2004, while only 8 Republicans are running in districts carried by John Kerry.

What’s more, of the twenty-five districts in which the Democrat was last elected with less than 55 percent of the vote — historically a sign of vulnerability — all but eight are districts carried by Bush.

The current breakdown in the House is 231 Democrats and 198 Republicans, with 2 vacant seats formerly held by Democrats and 4 vacant seats formerly in GOP hands. 218 would constitute a majority. So, if my math is right, the GOP would need a 20-seat pickup this November to carry the House. It doesn’t seem a likely outcome according to nearly all the pundits. But, then again, pundits continue to underestimate the strength of John McCain at the head of the GOP ticket.

According to the latest Zogby poll, McCain scores 46 to 40 percent against Obama. Just last month it was 47 to 40 — in Obama’s favor! That’s a huge turnaround, undoubtedly traceable to Obama’s recent problems with his pal Reverend Wright. As for Sen. Clinton, Zogby also shows McCain leading, 48 to 40. In Rasmussen’s daily Presidential Tracking Poll, McCain leads Obama 48-42, and Clinton 49-43.

If and when Sen. McCain moves to 50 percent or better in these polls, it would be a true sign of electoral strength. It would lift spirits for a strong GOP showing in the House and Senate. And, as I mentioned earlier, the chances of Hoover-like high-tax and trade-protectionist policies — which would be inimical to economic growth and devastating to the stock market — grow slimmer and slimmer.

Here's the third and final installment in the Laffer Curve video series. It explains why lawmakers need to ditch their dreadful static scoring model when it comes to the revenue-estimating process, in favor of the more accurate dynamic scoring model.

Unfortunately, Congress's revenue-estimating process is still based on the preposterous theory that changes in tax policy don't affect economic growth. Huh? In other words, the current system assumes the Laffer Curve doesn't exist. This of course leads to a bias for tax increases and against tax cuts. Hello Hill-Bama...

Reduced marginal tax rates have stood the test of time. They are an effective economic stimulant, creating permanent incentives to work and invest and sufficient fire power to expand the economy’s long-run potential to grow.

Monday, March 17, 2008

Did Bear Stearns really need to go down in flames? It’s a question that needs to be asked, and my answer is no.

Of course, I don’t know the value of Bear Stearns’s assets, and whether they could have served as collateral for private or government loans. So I cannot be entirely certain that my answer is correct. But here’s how I see it:

Since the elimination of the Glass-Steagall Act in 1999 -- a move that broke down the wall separating commercial and investment banks that had existed since the 1930s -- the Federal Reserve never changed its discount lending policies. In other words, until Sunday night, when Bear Stearns was already destined for the dustbin, the Fed was able to make loans to commercial banks like JPMorgan Chase, but not directly to brokers like Bear Stearns.

Throughout the credit crisis, which dates back to last summer, the Fed’s discount lending to banks was supposed to trickle down to brokers. But it never really did. Big banks either horded their cash or spent it for their own various purposes. As one Bear Stearns official noted to me, this is the first credit and lending crisis since the end of Glass-Steagall. And the consequences for Bear Stearns were catastrophic. While the Fed announced a $200 billion auction lending facility for both banks and brokers last Tuesday, that facility won’t be activated for a couple more weeks. So no help there.

But if the Fed had changed its discount polices to reflect the post-Glass-Steagall era, Bear Stearns could have accessed short-term Fed loans, even for a few days. That could have made all the difference in the world.

Watching the venerable old firm pawned off to JPMorgan Chase for a couple hundred million bucks -- basically a bag of peanuts -- is painful to me. The building itself is worth at least $1.5 billion. And even though Bear made big mistakes with sub-prime hedge funds, the firm is chock full of talent and brainpower. Down through the years, the smart people at Bear were able to avoid numerous financial difficulties while helping the firm stay profitable. Bear alumni are scattered everywhere, as successful investment bankers, broker-dealers, and financial advisors.

And yes, even one TV broadcaster. I served two stints at Bear Stearns, as chief economist and partner. I was there from 1978 to 1980, before heading to Washington to work for President Reagan. I was there again between 1986 and 1994, after which I resigned for difficult personal reasons.

But I won’t let my personal involvement with Bear cloud my judgment of recent events: In waiting so many years to revise its discount policies in a manner consistent with congressional legislation, the Fed is guilty of a serious policy error.

All of this kind of makes me wonder whether Bear Stearns wasn’t some kind of sacrificial lamb. Did government policy makers hope to convince the public that a big Wall Street firm could indeed fail? Or wouldn’t be bailed out? Listen, they were buried, not bailed out.

The fact is, Bear shareholders got creamed with the $2 per share purchase price. The shareholders include all the men and women who’ve worked there for years, and who own roughly one-third of the firm’s equity.

I applaud the Fed for backstopping the financial system and preventing a run on the whole banking sector. That’s what it’s there to do. Treasury Secretary Paulson said repeatedly, “the government is prepared to do what it takes to maintain the stability of our financial system.” He is absolutely right. So is President Bush, who said “we’ve taken strong and decisive action in challenging times,” adding that “in the long run our economy is going to be fine.”

While the media is trying to make pessimism our new national pastime, the president is right. The U.S. has faced numerous credit crunches down through the years and the free-market economy has survived very well.

What’s more, while the usual clamor for more government action is coming out of Washington, let’s not forget that it’s the private sector that drives our great economy towards success. Prosperity-killing actions from Washington, like tax hikes, trade protectionism, or massive over-regulation, would certainly stunt the long-run health of the economy.

Ultimately, market prices in the housing sector must adjust. That is the only viable solution. And while some families will be forced to become renters, other families will have a chance to purchase a new home at affordable prices. Capitalism is all about winners and losers, and it’s the market that must drive the adjustment, not the government.

And for all the disappointed Bear Stearns partners out there, including the many families and friends that I know well, hold your heads up high. Better days are coming.

Sunday, March 16, 2008

A great old firm got bought out today for peanuts. I was a partner before and after the Reagan administration. A sub-prime credit casualty.

Paulson and Bernanke have done exactly the right thing. It was a run on the bank. The Fed stopped it right there. No banking crisis.

The big Wall Street banks are in good shape, even with earnings losses they're still well capitalized, profitable and solvent. Fed stopped it from spreading on Friday; JPMorgan takes them over tomorrow.

The Fed cut the discount rate today by a quarter point. It will reduce target the fed-funds rate on Tuesday. The banking system will function fine. That's the key.

Paulson was good on the talkies today, emphasizing confidence in the banking system. He's a capable guy who is working the phones and is in touch with everyone This is how to stop a crisis. Bush was right to put on an optimistic face on Friday in my interview and later in his speech to the N.Y. Economics Club.

Senator Schumer is calling Bush "Herbert Hoover." But Hoover signed protectionist Smoot-Hawley, just as Hillary and Obama are today trying to break up NAFTA. Hoover signed a huge tax increase, just as Hill-Bama are preaching. The Dems are emulating Hoover. Bush is trying to stop it.

But the administration should be pushing for a strong dollar. That would help.

Saturday, March 15, 2008

(Here are some observations from my interview with President Bush. The transcript of our conversation follows.)

President Bush remained optimistic about economic recovery. He wants to avoid regulatory overkill on housing and the credit problem. He opposes Rep. Barney Frank's new FHA mortgage buyout plan. He is not changing his dollar policy, and is not worried about inflation.

In general, the president believes that economic growth will eventually spur the dollar to recovery. He struck back at Senator Obama and congressional Dems who want to repeal his tax cuts and spend heavily.

He had strong words of support for Senator John McCain, and believes Big Mac will keep taxes down. Finally, the president chose not to comment on Eliot Spitzer’s recent fall from grace into prostitution.

TRANSCRIPT

Q President Bush, welcome back, sir; thank you very much.

THE PRESIDENT: Larry, good to see you.

Q Let me begin with this. Earlier this morning the stock market was down 300 points on the news that JP Morgan Chase and the Federal Reserve Bank of New York have bailed out Bear Stearns and Company. Your comment on that?

THE PRESIDENT: My comment is that the Treasury Department and the Fed are taking swift action, along with JP Morgan, to help bring some order to the financial markets.

Q You have said time and again that you oppose government bailouts, that you oppose the use of taxpayer money to bail out. I want to ask you if that opposition applies to these large banks.

THE PRESIDENT: Well, these are unusual times. These are times that -- where there's a confluence of housing market risks and financial risks that require unusual action. And it's very important for the American people to know that the Fed and the Treasury carefully weigh the --necessary to bring some order and stability versus moral hazard. And I think they've struck the right balance in this case, particularly when people look at the details of the transaction.

Q When did you first learn of the Bear Stearns problem and the actions to be taken?

THE PRESIDENT: I was aware yesterday that the Treasury was thinking about taking some actions. I spoke -- they finalized their deal evidently late last night, and so I talked to Secretary Paulson this morning.

Q Does the Treasury Department extend any credit lines to this? I mean, the Federal Reserve is putting liquidity in, as they do -- what's the role of the Treasury here?

THE PRESIDENT: I think the Treasury was just part of making sure that the transaction was done in such a way as to balance stability and moral hazard.

Q All of this, of course, takes the so-called credit crisis to a new level. So I want to ask you, yesterday House Financial Services Chairman Barney Frank unveiled a new plan to use the FHA with a huge expansion for purchasing mortgages, even mortgages from delinquent borrowers. Some people are saying it's $300 billion; it might cost the taxpayers about $20 billion when it's all done. Have you decided whether you would support Mr. Frank or whether you would veto his idea?

THE PRESIDENT: Well, the only -- as I understand, these are -- they hadn't marked this bill up yet. But they have marked up other bills, and I'll just give you an indication of where my head is.

First, they proposed $4 billion to buy empty, abandoned houses -- which I strongly oppose; that doesn't help anybody who's trying to stay in their house -- it helps lenders. Then they proposed changing the bankruptcy law, which would cause interest rates to go up eventually, which would make it harder for people to buy homes, so I oppose that. And I am concerned about any government intervention with new law that will end up making it harder for the housing market to recover expeditiously.

So our policy is to help people refinance their notes, is to help people who are credit-worthy stay in their homes. And our FHA Secure and our HOPE NOW Alliance is beginning to have pretty good progress. As a matter of fact, the rate of foreclosure versus the rate of restructuring has changed -- there's been more restructuring and the rate is better for restructuring than for foreclosure. And I would advise people who are worried about staying in their homes to get a hold of the federal government and to find out how they can get help to restructure.

Q So with respect to Mr. Frank's idea, which may be picked up by Senate Banking Chairman Dodd, they're going to offer delinquent borrowers some FHA relief. Is that a deal-breaker for you?

THE PRESIDENT: Well, there's a lot of deal-breakers from how you've described this law. I think a couple of things, Larry. One, that we ought to make sure that this stimulus package we passed has a chance to work before government overreacts. Listen, I'm open to new ideas, but I'm not open to ideas that will make it harder for the market to recover.

What we need is for the market to work its way through, to help people stay in homes who are credit-worthy, to get excess homes off the market by having the market function well. But we also got to give this stimulus package a chance to work. It's over $150 billion of money is going to be headed out the door either as incentive for businesses to buy equipment or direct rebates to American consumers. And those checks will be hitting the second week of May. So, obviously, the real substantial effects of this stimulus package have not had a chance to take hold.

Q This morning we had some other news. Now, the Consumer Price Index was released for February -- and it actually came in flat, below expectations -- but it has been rising at a 4 percent annual rate, faster than worker wages, some people say the worst in 15 years; on the inflation front, retail sales down two of the last three months. The question is, is this a 1970s repeat of inflationary recession, sometimes called "stagflation"?

THE PRESIDENT: I think we're in an unusual period. We went through 52 consecutive months of uninterrupted job growth, and like any free market there's also downturns, and we're in one. And the question is how best to react during the downturn. Fortunately, we anticipated the downturn and have proposed a temporary, robust stimulus package -- which hasn't yet to happen.

You know, people believe -- the experts believe, and they tell me -- and I'm certainly no economic expert, but they tell me that this package will have a very positive effect on the economy throughout the year.

Secondly, there's obviously having to deal with issues in the credit market. And yet today you notice that the Treasury Department and the Fed acted expeditiously, acted firmly, without creating what's called moral hazard. And the Fed is also obviously maintaining a watch on inflation and, at the same time, sending signals that they're interested in robust growth.

Q Are you worried about this inflation story? It's really just kind of snapped up in the last three or four months, kind of come out of left field -- nobody expected it.

THE PRESIDENT: What I'm worried about is the downturn that we're in. And these stories get exacerbated because we're in a slowdown. And of course we're watching -- in this case, the Fed is watching the relationship between inflation and growth. And I've got all the confidence in Ben Bernanke. I think he's doing a very fine job during difficult times.

Q But what about the dollar? A lot of people are pinning the inflation problem on the continuous decline in the dollar.

THE PRESIDENT: Look, we're for a strong dollar in the U.S. government. And the best way to -- and economies go up and down. But I'm confident in the long-term strength of the dollar, because I'm confident in the long-term strength of our economy. And what's very important during this period of time is to show the world that we're not going to leave behind a regulatory or law that will make it difficult for our market to recover -- in other words, not going to overreact during this period of time with unnecessary law; that we're open for trade and investment and so that the long-term picture for the United States economy is going to be as good.

Q But you said yesterday in another interview that you were for a stronger dollar, comma, absolutely.

THE PRESIDENT: Yes, I am.

Q It kind of sounded like you were changing your rhetoric or changing policy.

THE PRESIDENT: No, no. That's the problem with this rhetoric on dollar policy -- if I even put a comma as opposed to a period, people are suggesting change. Our policy has not changed: We're for a strong dollar.

Q Steve Forbes, conservative editor of Forbes Magazine, wrote a tough editorial. I want to get your response on that. He asked, "Can it be true, a Republican President repudiating the anti-inflation legacy of Ronald Reagan?" And he calls this thing, "Jimmy Carter Bush." Do you have a response to Mr. Forbes --

THE PRESIDENT: I like Forbes, he's a good man. But if I responded to every editorial written about me, you and I would be spending hours talking about them.

Q So you don’t think you've given up on the anti-inflation legacy?

THE PRESIDENT: I think we've just come off with a strong period of economic growth, after difficult times. We'd been through a recession, war, terrorist attack, Katrina -- and yet, we had 52 consecutive months of uninterrupted job growth, the longest sustained in the country's history. I've cut taxes; Congress needs to make those tax cuts permanent, by the way, in order to send a signal of -- that this economy of ours is going to be strong. The deficit as a percent of GDP is below norm. So we've had a good record. We're just in a tough period right now.

Q Just on this -- last one on the dollar, sir, if I may. Middle East oil producers are leaving the dollar as their standard -- Kuwait is doing it, the United Emirates are doing it, Qatar is doing it. Some people are saying that this big dollar drop is costing us prestige, that American prestige -- in war time, particularly -- is falling, that our enemies and our friends are ridiculing the greenback. Does that really affect you? Is that something you think about, loss of prestige --

THE PRESIDENT: No, I think about making hard decisions now so that we'll live in peace and security. The biggest threat we face is a terrorist attack, or making policies that strengthen these radicals and extremists who would like to do us harm. So what I think about is protecting the United States of America, and it requires some tough decisions. And I'm willing to make them and I will continue to make them so long as I'm the President.

Q Senator Obama on the campaign trail -- I want to read you a quote from one of his recent speeches: "It's a Washington where George Bush hands out billions in tax cuts year after year to the biggest corporations and the wealthiest few, who don’t need them and don’t ask for them; tax breaks that are mortgaging our children's future on a mountain of debt; tax breaks that could have gone into the pockets of the working families who need them most." And I might add, the Senate and the House are considering a budget which will repeal the tax cuts, which is the centerpiece of your economic strategy. What is your response to Senator Obama and the congressional Democrats?

THE PRESIDENT: I would leave it generic. For all those who say the tax cuts are bad, I just simply ask them to look at what happened after we inherited a recession and after the attacks of September the 11th. I think giving people their money back makes a lot of sense. The problem we face, Larry, is that these folks aren't arguing for -- they're arguing for raising taxes because they want to increase government. That's why they want more money in Washington, D.C. -- they got all kinds of spending plans.

And as I told you, Larry, you know, the deficit as a percent of GDP is below norm, and one reason why is because we have held the line on spending, except for defense.

Q But isn't it true that so far this year government spending is back to an 8 percent rate and the deficit estimates are over $400 billion?

THE PRESIDENT: Well, one reason why they're over $400 billion is because of the $150 billion tax cut that we're fixing to give the American people to help us through this rough patch. In terms of spending, I can't answer that question, but if it is, it's only for one reason, and that's because we're spending it on our troops -- and we'll continue spending it on our troops and homeland security so long as I'm the President. We owe these kids all the support they need so they can get the job done.

Q Now, you have warmly embraced Senator McCain as the Republican nominee -- warmly embraced him. But of course, many conservatives want to know, do you trust Mr. McCain to maintain your tax cutting legacy, since he voted against the tax cuts initially in 2001 and 2003? Do you have faith in him now that he will keep your legacy intact?

THE PRESIDENT: Absolutely.

Q No question?

THE PRESIDENT: No question in my mind.

Q Why do you think --

THE PRESIDENT: And not only do I think he'll be good on tax cuts, I know he'll be a good, sound fiscal watchdog. Plus he'll stay on the offense against the terrorists and extremists. He's the candidate that is more likely to protect the American people from additional harm.

Q How do you handicap this race right now?

THE PRESIDENT: I think he'll win.

Q You do?

THE PRESIDENT: But I don’t know who he's going to run against, so we'll just have to wait and see. But I've got confidence in John McCain. He's a battler, he's a competitor, he's got a good vision for America, and he's got a great heart. And I think he'll win.

Q One last one here. Up in New York, as I'm sure you know, the big headlines, "Governor Eliot Spitzer's Fall from Grace," "Engaged in Prostitution for at Least a Decade," it's still on the front pages this morning because federal prosecutors are now looking at the possibility he used campaign funds in his prostitution relationships, he may have even used government funds. Do you have a thought on this? I've not heard you comment on the Spitzer story.

THE PRESIDENT: I haven't commented on it and I don’t intend to. My concern is for his family, and I'll leave it at that.

Q All right. President George Bush, thank you very much, sir, for coming back on Kudlow and Company.

Friday, March 14, 2008

On tonight's special edition of Kudlow & Company, we will feature my exclusive, one-on-one interview with President Bush. We will also have expert analysis from our Washington to Wall Street panel who will discuss and debate the various topics covered during the interview.

*Art Laffer, economist, former Reagan economic advisor, president of Laffer Associates*Bob Reich, former Clinton labor secretary, author of "Supercapitalism" and professor of public policy at the University of California Berkeley

*OBAMA, HILLARY, MCCAIN & THE SPITZER SCANDAL*

Messrs. Laffer & Reich will do double-duty in this segment.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Thursday, March 13, 2008

Is there a rift between the White House and the Treasury on U.S. dollar policy?

President Bush said yesterday on PBS’s Nightly Business Report that the dollar’s fall to record lows against the euro is bad news. He said, “Those aren’t good tidings, if you’re for a strong dollar like I am.” He also acknowledged that the weaker greenback has contributed to higher oil prices and more rapid inflation. When asked by PBS anchor Susie Gharib if he wanted a stronger dollar, the president replied, “I would, absolutely.”

Today, while gold briefly hit the $1,000 mark, and while the dollar fell to a new all-time low against the euro and slid below 100 yen for the first time in over twelve years, Treasury Secretary Henry Paulson told reporters at the National Press Club that he believes “very much that a strong dollar is in our national interest.” Confusing matters, however, the Treasury man added that U.S. long-term fundamentals “are strong, and I believe they are going to be reflected in the currency market.”

Some have come to associate Paulson’s wording with a tolerance for a weaker dollar. Others believe it’s a form of currency protectionism to spur exports. Either way, the question lingers: Are Paulson and Bush on the same page about the dollar?

There may be less here than meets the eye. While the Treasury would undoubtedly prefer a greenback rally to suppress inflation, there is a good deal of skepticism in the building that this is possible in the short-run. And there is considerable skepticism that the Europeans would lend a hand. It also must be noted that policy coordination and communication between the Treasury and the White House are very close. As a result, Bush likely didn’t break any new ground in his dollar remarks last night.

Nobody in the administration is happy with the price of oil or gold. Nor is there much glee about the pickup in inflation. This includes, by the way, today’s report that import prices are running 13.6 percent higher than February 2007 levels, and are roughly in line with the 13.8 percent import price hike registered in January.

In my conversations with various officials, I get the sense that rather than the dollar, an amelioration of the housing credit and foreclosure problem is the current number-one priority. Earlier today, Paulson announced a new set of regulations and guidelines for various players in the home-loan mortgage game. These proposals are all quite sensible in the effort to bring greater transparency, disclosure, risk awareness, and simplicity to the mortgage market.

Incidentally, the Treasury Secretary told reporters that there will be no immediate increase in capital requirements for banks and other lenders. He believes that now is the time to raise capital to meet existing requirements, in order to strengthen the financial system. Paulson also repeated his view that a huge sub-prime mortgage-loan bailout by the government simply was never on the table.

Fixing this mortgage mess is important. But at the same time the Treasury should be working to stabilize and appreciate the dollar. The same, of course, can be said of the Federal Reserve. I’d like to see some dollar diplomacy with the Group of Seven nations, difficult as that may be. I’d also like to see an occasional intervention to buy dollars. That would put traders on notice. It would indicate that this is a two-sided market. Right now, traders are fearlessly shorting the greenback and making good money doing it.

But here’s the bottom line: A stronger dollar would surely reduce inflation pressures and promote economic growth. So would a broad-based corporate tax cut, which would spark both the economy and the stock market.

THE MARKETS...Our all-star market and economic panel will discuss and debate all the latest stock market news and economic developments.

On board:

*Ken Heebner, co-founder of Capital Growth Management*Bob Stein, senior economist at First Trust Advisors*John Browne, former member of Parliament*Prof. Edward Altman, NYU Stern Business School professor *Kevin Kerr, president of Kerrtrade.com and editor of MarketWatch's Global Resources

$1000 GOLD, SURGING OIL, & AN AILING GREENBACK...Joining us to discuss the latest developments are Cambridge Energy Research Chairman Dan Yergin and Kevin Kerr, president of Kerrtrade.com and editor of MarketWatch's Global Resources.

WASHINGTON TO WALL STREET...CNBC chief Washington correspondent John Harwood will join U.S. News & World Report's Jimmy Pethokoukis and Jared Bernstein from the Economic Policy Institute with a look and a discussion of all the latest money politics issues facing investors.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Wednesday, March 12, 2008

Here’s a table showing exactly what the Fed did yesterday, and how much they have already done.

Yesterday was the central bank's $200 billion dollar announcement. This is the Term Security Lending Facility (TSLF). Prior to this move, we had the $100 billion dollar, so-called Term Auction Facility (TAF). There's also the $100 billion dollar term RPs (roughly one-month, but it can be rolled over.) And finally, the Fed announced $36 billion in currency swaps with foreign central banks. (They may save the U.S. dollar, before we save it ourselves).

The grand total is $436 billion dollars. That’s a nice chunk of change.

Here’s the key in all this: So far as I can determine, none of this liquidity is expanding the Fed’s balance sheet. They’re actually doing this quite cleverly. They are not expanding reserve back credit. They’re not expanding the monetary base. They’ve “sterilized” part of this, and the rest of this is just a bunch of swap agreements.

SPITZER'S LEGAL PROBLEMS...Our panel will discuss and debate. Attorney and former prosecutor Joe diGenova will take a look at the road ahead for Mr. Spitzer along with Dennis Kneale, CNBC media and technology editor.

MONEY POLITICS...We'll have a Washington to Wall Street debate on all the latest issues and developments facing investors between Jared Bernstein, senior economist at the Economic Policy Institute and The Wall Street Journal's Steve Moore.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

“I used to work for Geraldine Ferraro. I like her a lot. But I think the comments were way off base. I think alternatively you could say, if Barack Obama had been born white, to a very wealthy family in this country, and had gone to Columbia and Harvard Law School, he’d be exactly where he is today. I just think all of this is a disaster for the Democratic Party. Race has been injected way too much in this campaign. Going all the way back to [Hillary Clinton's New Hampshire Co-Chair] Billy Shaheen in New Hampshire. Going [back to Hillary Clinton’s chief strategist] Mark Penn talking about cocaine on television. All of this is a disaster. It’s a disaster in terms of the loyalty of African-American voters, if Hillary Clinton wins the nomination. It’s a disaster if she loses the nomination, because she’s doing great damage to Barack Obama in the process.”

Yesterday marked the Federal Reserve’s largest liquidity injection yet to banks and brokers. The Fed announcement produced Wall Street’s best day in five years. The Dow rocketed over 400 points. Stocks rallied around the world. The key question now becomes whether or not the news is a real game-changer or a one-day wonder. Here is some interesting stock market and economic insight on all this from last night’s Kudlow & Company.

Andy Busch, global FX strategist at BMO Capital Markets: The Fed action today [was] a very good thing. They needed to relieve part of this credit crunch in the repo market. You and I have talked about this before, it’s a very good thing. And I’m happy that the Fed did it. Obviously, the stock market is extremely happy. [But it doesn’t yet change fundamentals.] The key structure that’s underlying these markets is home prices. That’s the key thing that hasn’t changed yet. We haven’t seen home prices stop falling. But they’re getting close. I feel that in the next 2 or 3 months, we’ll see that occur. [If we see that occur, it is bullish for stocks], absolutely. That is the key thing. For all these ABS, mortgage-backed securities, the underlying security underneath these things is home prices. And if that stabilizes, then that gives us some sure footing where we can evaluate these securities and feel confident that we know what their prices are—and therefore all the companies that own this stuff…It does alleviate a major problem.

Don Luskin, chief investment officer at Trend Macro: Well, [the Fed] finally did the right thing. I only wish they’d done it in August…[But] they finally figured out how to do it. They finally figured out how to convert the excess supply of mortgage-backed securities that nobody wants, into T-bills that everybody wants. It’s a beautiful, risk-bearing arbitrage. The Fed has created a bridge across the chasm of risk to bring cash to people who need it. To bring T-bills to people who need it. It’s just an amazingly brilliant thing. The only problem is, this perfect treatment is being applied to a patient that’s already about three-quarter’s dead. So timing is everything, but at least they finally did it.

Stefan Abrams, managing partner at Bryden-Abrams Investment Management: I don’t believe this is time to unzip your wallet. What the Fed has done today is a terrific step…better late than never. But until we see credit default swap prices down, spreads in the corporate market, spreads in the mortgage market, spreads in the junk bond market, until we begin to see a resumption of more normal—and I won’t say totally normal—but more normal lending practices, the stock market is still hostage to the credit markets…I think [investors should] take a long lunch hour. There’s no need to rush here.

Tuesday, March 11, 2008

TODAY'S FED ACTION, STOCK MARKET SURGE & WHAT IT ALL MEANS...Our all-star stock market and economic panel will discuss and debate the meaning of today's Fed move and what it all means for the markets and the economy going forward.

MISSISSIPPI SHOWDOWN...Pollster Scott Rasmussen from Rasmussen Reports will weigh in with his perspective and polling data on tonight's southern battle between Hillary and Obama.

ALSO ON BOARD: Democratic strategist Bob Shrum and nationally syndicated conservative talk show host Michael Medved will square off on all the latest Washington to Wall Street issues including the ongoing battle between Hillary and Obama.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Monday, March 10, 2008

Recession or not, the economy is definitely in a significant slowdown. This poses a daunting challenge for the Republican Party. Not only could it make Senator McCain’s election tougher, but it’s going to affect House and Senate races as well.

The litany of economic woes continue to mount: falling jobs, decimated housing, the subprime credit virus, record gasoline prices (almost $3.20), $107 oil, a slumping dollar, and the march toward $1000 gold. Now I don’t to want create a pessimism bubble here, but standard-bearer McCain must come up with a strong, pro-growth message that has a significant reform element.

Take a look at the accompanying charts from the bond market. Inflation fears are rising, while real interest rates have fallen below zero. Prices are going up, and the economy’s going down.

This is one reason why my idea of a McCain dollar could be very important. A stronger greenback would reduce inflation. Cutting corporate taxes, as well as reforming the entire tax code, might also help. Spending restraint and earmark reform could work as well.

But the real eye-opener -- a topic no one has tackled on the campaign trail, at the White House, or in Congress -- would be the McCain dollar. Just as in President Reagan’s first term, and Bill Clinton’s second term, a strong U.S. dollar would bring down the cost of food and energy. It would also bolster real worker wages and family income purchasing power.

Right now, a simple gold/inflation forecasting model is predicting 5.7 percent CPI this year and 7.4 percent next year. This, after 4 percent in 2007. Yikes! The GOP has its work cut out for it.

Friday, March 07, 2008

I am for economic stimulus. Don’t get me wrong. But I am for real economic stimulus which is cutting tax rates. Because this market is short of a few things: It’s short of liquidity—the Fed can deal with that. It’s short of capital. If we want more capital, we should start increasing the returns to capital, and cutting tax rates, or at least making tax cuts permanent. This is very important…You’ve got to get Washington to deliver on tax cuts and incentives.

-John Ryding, chief US economist at Bear Stearns on CNBC's Kudlow & Company last night

THE DYNAMIC DUO...Our money politics/recession debate this evening will feature regulars Steve Moore from The Wall Street Journal and Robert Reich, former labor secretary and author of "Supercapitalism."

THE FED & THE ECONOMY...Our all-star economic panel will discuss and debate all the latest significant news and developments.

Thursday, March 06, 2008

What follows is a transcript of my recent interview with former Texas Senator Phil Gramm. Mr. Gramm boasts a long, distinguished, pro-growth track record. Currently a UBS investment banker, Gramm has long been a steadfast supporter of free markets, a staunch free trader, tax cutter, budget cutter, and entitlement reformer. He also happens to be GOP presidential nominee John McCain’s chief economic advisor. As a recent piece in Fortune magazine put it, [Gramm] “is the ultimate pure play in free market faith.” I remain quite confident that Mr. Gramm would help steer a McCain presidency in the right direction.

Kudlow: Senator Gramm, it is wonderful to see you. Senator McCain said a while back, “I don’t know as much about the economy as I should.” What’s he trying to tell us on that?

Gramm: Well, first of all, he’s trying to tell us that A, he’s honest, and B, he’s humble. How many people know as much about the economy as they should? Certainly I don’t. I think you can make a strong case that of the three people that are still in the race, that John McCain’s got a lot more experience on economic matters. But one thing I think that makes him a leader that I feel confident in, is that he’s the kind of person that reaches out to people, that listens to both sides of the debate, that gathers the facts, and that tries to make the best decision he can. And I think he’ll do that on economic matters.

Kudlow: Well, let me ask you this. A President McCain could inherit a tough situation. I mean, most economists believe we’re on the edge of recession, if not in one. And I’m particularly worried about the falling dollar and the rising inflation rate. Some people are mocking us Senator Gramm. The dollar keeps falling. Our enemies say it shows America’s decline. In your judgment, would Senator McCain be a currency reformer? Would he resurrect the dollar?

Gramm: Well, I think he would resurrect the dollar, but not through currency reform. I think his position would be that sound economic policies produce a sound dollar. I think he would cut taxes. I think he would institute a program of long-term fiscal restraint at the federal level. I think he would reduce the regulatory burden. And I think in the process, we would attract capital. The dollar would get stronger. The economy would recover. And I think it’s important in looking at our economy today—the states that have the lowest taxes, the least regulatory burden, the most pro-growth governments, are the ones that are succeeding. [But look at] the ones that are failing, Michigan for example. A lot of automobile jobs are being created in America, including the new jobs in Arlington, Texas, for the new electric car. Now, all of Toyota’s Tundra trucks are produced in San Antonio. But they’re not investing in Michigan because of high taxes and high regulations. So what we need to do is implement Texas policies in America.

Kudlow: Alright, I hear you on that. But some people are asking the following question. In the McCain economic camp, how do you all get along with each other? You got yourself—nobody is more free market, rock-solid than you are. You got supply-siders like Steve Forbes and Jack Kemp. On the other hand, as Senator McCain travels around, he mentions some of his root-canal advisors. He’s got Pete Peterson, and he’s got Warren Rudman, who tend to be high taxers. He’s got the Concord Coalition, who’s never met a tax they didn’t want to raise, allegedly to balance the budget. It sounds like there’s a war between the growth guys, and the austerity guys, in the McCain camp. How do you resolve that?

Gramm: No, I don’ think there’s a war. But look, when we have a president who is making decisions that are going to affect the lives of real people, I want him to listen to every side of the argument. I know where he stands. I know what he believes. I know what his instincts are. But look, I don’t think you want a president who, A, surrounds himself with “yes” people, and I don’t think you want a president who’s listening to only one side of the argument. I think there are times when supply-side economics does, and should, carry the day. But I think there are demand-side factors. I think we want a president, in these tough times, who’s going to get the best advice he can [get], who’s going to bring together the best people he can get, and then make a decision. So, look, I view it as a plus that he’s got differences of opinion.

[Break]

Kudlow: …It’s very interesting to me. In both diplomatic terms, and economic terms, Hill-Bama, as I call them, have not been at all bashful in stopping out, or proposing to stop out, a very important treaty, namely NAFTA. And they don’t seem to care about the trade benefits to the United States. Where does Senator McCain come out on this crucial issue?

Gramm: Well, Senator McCain was for NAFTA. He would like to see NAFTA expanded in terms of opening up more markets for more American jobs. But let me just give you my response to this NAFTA thing. First of all, when you listen to the two Democrat candidates, what they’re really saying is we can’t compete with Canada! Well, if we can’t compete with Canada, who can we compete with? And are they proposing that we build a wall around America? Go hide under a rock somewhere? You can’t lead America and hide from the world. Secondly, we have a treaty obligation with Canada and Mexico. And to suggest with our closet ally and friend in the world, with our neighbor, that we’re just going to unilaterally change the treaty because we’re pandering for union votes in Ohio, I think is outrageous. I think it’s dangerous. I think it’s irresponsible. NAFTA has created jobs. And it’s created the most jobs in the states that have had the best policies.

Kudlow: You know Senator Gramm…years ago, you were probably the leader in the U.S. Senate, and perhaps the Republican Congress—no, it was a Democratic Congress in 1993, 1994—in stopping [then First Lady Hillary] Clinton’s big government solutions for health care. So let me ask you this. What do you and Senator McCain hear? You hear Obama. You hear Clinton. You’re an expert on healthcare. Mr. McCain believes in consumer power for healthcare. How does this crucial issue to Americans play out in your judgment, in your mind?

Gramm: I think healthcare is going to be a big issue. And I think it’s going to be a very simple choice. The Democrats want the government to control your healthcare. Senator McCain wants your family to control your healthcare. Not the government. Not the insurance company. The problem with healthcare is not quality. The problem is cost. And Senator McCain wants to address that problem with more competition, and more efficiency, and things like legal reform. The Democrats want the government to take over and run the healthcare system. And in every [government-run healthcare] country in the world, that [approach] has limited freedom, it’s lowered quality, and it’s tended to bankrupt the country in question.

Wednesday, March 05, 2008

So, Hillary’s got a second life after her sweep last night of Texas and Ohio. The game goes on.

The next big state showdown is in Pennsylvania on April 22nd. Indiana and North Carolina follow in early May. Hillary’s claim to having won the big states is a strong one, especially if she can take the next three.

But the real winner yesterday was John McCain. No doubt about it. Mac completed his primary victory journey in one of the greatest comebacks in American political history.

On Kudlow & Company last night, Phil Gramm, McCain’s chief economic advisor, talked about McCain's commitment to pro-growth tax reform, spending restraint, and free trade. (As bad as Hill-Bama are on trade, Mac is excellent.) The pro-growth former Texas Senator also discussed a healthcare program that is consumer-powered, not government-controlled.

However, I continue to believe that Sen. McCain should be talking up the dollar. We need a McCain dollar appreciating reform plan. We need dollar diplomacy, with the U.S. Treasury and the G7 finance ministers. We need a Reagan dollar to boost American prestige and strength throughout the world.

There is no question that a McCain presidency will be vastly better for stocks and the economy than Hill-Bama. For a considered viewpoint regarding Hill-Bama economic policies, what follows is my conversation with legendary GE Chairman & CEO Jack Welch on last night’s program. Mr. Welch pulled no punches.

* * * * * * *

Kudlow: Jack Welch, welcome back to the show, sir. We love seeing you as always. Did Senator Obama listen [to the advice you gave him on CNBC back in January] from what you now know?

Welch: He’s the smoothest guy in town, I’ll tell you. He put me under the table, and didn’t listen to a word I said.

Kudlow: That’s right. Didn’t listen to a word you said. And that’s where I want to pick up on this. Now let me ask you, first up, Warren Buffett was on the network yesterday or the day before. He thinks we’re in recession. Do you?

Welch: Well he said we’re in a practical recession. We’re certainly in a slowdown. But if I had to bet a dollar or two, I’d bet we’ll have a positive GDP in the first quarter, and the second quarter. But it’s certainly is a slowdown of enormous proportions from what we were experiencing.

Kudlow: Alright, I like your optimism very much, as always. So let me ask you, you’ve seen a lot more of Hill-Bama, as I’ve taken to calling them. Senator Clinton, Senator Obama on the campaign trail, particularly in Ohio, bashing trade, bashing businesses, bashing wealthy people, talking about income inequality. As you look at this, you’ve seen a lot of elections, you’ve been through a lot of election cycles. What’s your read here? What should people be thinking about?

Welch: Larry, you know everyone’s talking about why the market’s tanking, the slowdown, and everything else. I think the market’s also tanking on the fact that there’s an enormous Democratic surge in voting. They’re outvoting the Republicans in every primary that’s out there. And there’s a great enthusiasm for change away from the Bush administration. And I think people, the market, is usually ahead of things, are seeing some of these crazy proposals that are out there from these people. We’d be the only country in the developed world that’s raising taxes, not lowering taxes. And there’s a whole series of programs here. And Larry, we haven’t even talked about yet, the first thing they’ll do is pass that damn [Employee] Free Choice Act. And if you want to see jobs escape, in a country where [American workers] don’t have a secret ballot for voting, you’ll see it happen here.

Kudlow: Well that’s not the only one. Look, that’s an interesting theme [about] the union influence. This is the first time in quite some while. When Bill Clinton ran he kind of dissed the unions. He was never beholden to them. But Senator Obama and Senator Clinton, we’re seeing in Ohio, but we’ve seen it before, they’re very much in tune with the unions. Now, one of the union proposals is to set wages not on supply and demand, but on some social theories. And this kind of equal pay, comparable wages, I mean what would this do to large corporations? What would this do to companies in America?

Welch: It’ll kill small business. It’ll kill everybody. I mean, it’s just bad for us Larry. Now hopefully, in the Democratic primary, as they’re pushed to the left, the rhetoric will in fact overwhelm what they will do. And they’ll get back more towards a more centrist policy later on. You know, when you talk about the great Clinton years, we always hear [that], one of the reasons the Clinton years were so good is -– look at ’92-’94, they weren’t so good – [but] they became better when we had a strong Democratic president, with a charismatic personality, who dealt well with a Republican congress that Newt Gingrich led, that Dick Armey who’ll be on [Kudlow & Company] tonight, led. That was a team that worked together to get more moderate policies all through the ‘90s.

Kudlow: So basically, you’re suggesting the stock market is beginning to discount a Democratic victory. And you believe that the Democratic Party has shifted to the left. It’s essentially a union agenda on taxes, on the card check on unionization, on equal pay, on other things. On trade for example, stopping trade. That’s part of the union issue. You’re saying the stock market is already discounting some bad times, presumably in 2009. Is that basically where you’re coming from on this?

Welch: I’m not an expert on this, but I’d certainly be suspicious of that theory. I think it is in fact a real possibility.

Kudlow: And you think that’s more important than the organic issues we’re seeing – the credit problems, the recent rise of inflation, the slowdown, the slump in the dollar, and things of that sort. Corporate profits are soft. You think those organic issues are just part of the story, that the political issue is really becoming a big overhang?

Welch: Larry, corporate profits outside of the financial sector aren’t that bad. And of course credit is a real problem. Let’s not kid ourselves. I mean, credit has really dried up. So we’ve got to go through this process. But one of the things we have going for us now is information is so prevalent. Every cable channel, the Internet. So the responses to this slowdown have been immeasurably faster. And in fact, I think if we have a “small r’ – but I don’t think we will – if we have this slowdown we’ll be out of it faster than we ever would have been with all the stimulus and other things that are going on.

Kudlow: Just one last one Jack, before we bring in Mr. Shrum and Mr. Armey. And I hope you’ll stay with us for awhile. In a recent speech Hillary Clinton says, we’ll take on the oil companies and harness their record profits. We’ll take on the credit card companies. We’ll take on the insurance companies. We’ll go after the drug companies. We’ll take on Wall Street. Mr. Obama has said a number of times he wants to regulate corporate profit margins. What do you make of that? I haven’t heard anything like that Jack, in I don’t know, I don’t think I’ve ever heard anything like that in my professional lifetime.

Welch: You know I haven’t, and I’m older than you are. I have not heard it either. I think it [goes] back to the early days of Franklin Roosevelt, I think. That’s the last time we heard some of that stuff. Prewar. That’s why I think Larry, a real component of this Wall Street slowdown, aside from credit and the slowdown in the market, is this concern about this next election and going to these policies. These polices are really anti-business.

VOLATILE MARKETS, OIL, GOLD, AMBAC & MORE...Our stock market panel will sort through all of the various issues and developments affecting the stock market and economy.

*Doug Kass, founder & president of Seabreeze Partners Mgmt*Don Luskin, chief investment officer at Trend Macro*Fritz Meyer, senior investment officer with A I M Advisors*John Browne, former member of parliament*Kevin Kerr, president of Kerrtrade.com and editor of MarketWatch's Global Resources

ONE-ON-ONE WITH LAWRENCE EAGLEBURGER...The former U.S. Secretary of State will offer his perspective on escalating tensions between Columbia and Venezuela, Russian political developments, and Sen. Obama's foreign policy plans.

About Me

Larry Kudlow

Lawrence Kudlow is CNBC’s Senior Contributor. For many years, he was the host of CNBC’s “The Kudlow Report”. He is also the host of The Larry Kudlow Show, which broadcasts on Saturdays from 10am to 1pm ET on WABC Radio and is syndicated nationally by Cumulus Media. He is also a nationally syndicated columnist and a former Reagan economic advisor. CNBC's The Kudlow Report also airs on Sirius (ch.129) and XM (ch.127) weeknights at 7pm ET.